Proposed Railroad Merger Sets Stage for Shifts in Industrial Real Estate
Union Pacific’s proposed $85 billion acquisition of Norfolk Southern would reshape the nation’s transportation landscape, creating a rail network that spans more than 50,000 miles across 43 states and stretches from the East Coast to the West Coast.
The move would bring the country's coast-to-coast railroad infrastructure under a single operator for the first time since the golden spike was driven in Utah in 1869. Both companies assert that their union would streamline the movement of goods nationwide, improving efficiency across the vast system.
But history warns that such combinations can be fraught; stringent antitrust scrutiny remains in place following past mergers that led to significant traffic snarls and logistical backups.
The financial stakes are enormous. Data from NYU Stern School of Business Professor Aswath Damodaran shows the railroad industry, excluding the financial sector, posts some of the highest after-tax unadjusted operating margins in the U.S. at 31.75%—surpassed only by REITs and tobacco companies—demonstrating just how profitable railroads remain.
“This merger improves intermodal connectivity and sharply increases the ability to access inland markets for many distributors,” Nick Watson, vice president at Matthews Real Estate Investment Services, told GlobeSt.com. “The types of properties that will most likely be affected are standard industrial properties with rail access and industrial outdoor storage properties that handle container storage and other similar uses. There is already a limited supply of Industrial Outdoor Storage properties and Industrial properties with Rail Access. With increased demand for properties with these capabilities, investors can expect to see sharp rent growth, especially in select markets.”
If the two rail giants can successfully integrate their systems, the potential benefits are significant, according to Evan Ling, managing director at global consulting firm AArete. “If integrated correctly, this merger will allow for a seamless transition from rail to rail and will reduce interchange bottlenecks, which will help drive shipping costs down for rail and to be more competitive with the trucking industry,” Ling told GlobeSt.com. “On the risk side, there is the possibility of consolidation and slowdowns.”
For commercial real estate, the implications remain nuanced. “We expect core markets like Chicago and Denver will remain strong, but you could see more competition in other cities,” Liz Hart, president of leasing for North America at Newmark, told GlobeSt.com.
The merger could decentralize logistics and distribution, shifting distribution nodes to metros along the rail lines. While this may disrupt the current concentration of goods movement and storage, it could also create new opportunities and supply chain redundancies. “Shippers are getting confident in reliable rail,” Hart said. “It could ease the congestion that we’ve seen in West Coast cities. It strengthens our supply chain redundancy. We can more easily reroute cargo. My expectation is that we’re going to have an industrial boom in the next few years.”
Opportunities may also emerge for commercial real estate near newly established distribution nodes, as the industry adjusts to the new landscape. Still, before any of these changes can occur, the merger must withstand rigorous regulatory review, and the true impact may only unfold over time.
Source: GlobeSt/ALM